S’pore Press Holdings (OCBC)

Upgrade to BUY
Previous Rating: HOLD
Current Price: S$3.81
Fair Value: S$4.32

Upgrade to BUY; awaiting capital deployment

Almost got the Jurong Gateway site... A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m for a site beside Jurong East MRT station, and only 5.4% below the winning bid. This outcome was similar to a Bedok site auction in Sep 10. We think these strong tenders from SPH underline its desire to expand their retail landlord business. As of 2Q11, we estimate SPH to have a sizeable acquisition war-chest of S$1,265m, assuming a net gearing ceiling of 70%.

…but more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. The commercial site beside Paya Lebar MRT, with a large GFA of 86,940 sqm, could have a significant retail component after setting aside the minimum office and hotel requirements. In addition, the commercial site beside Fernvale LRT could house a retail development with 26,400 sqm GFA - around the size of Clementi Mall. There is also a white site on the reserve list beside Novena MRT with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.

TripleOne and 313@Somerset potential targets? Market talk is that TripleOne Somerset is on the market for about S$1.2b ($2,132 psf NLA) and that 313@Somerset could be for sale as well. These may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more l ikely for SPH to consider acqui r ing a stake or participating in a joint venture instead of acquiring these assets wholly.

Successful execution at Clementi Mall. Clementi Mall has opened for operations smoothly. The mall is fully leased with an average monthly rent of S$14 psf. Clementi Mall highlights SPH's retail management capabilities in a suburban location and the market would likely view similar acquisitions favorably. We forecast annual revenue at around S$30m from Clementi Mall after 4Q11.

Upgrade to BUY on valuation. The current price of S$3.81 indicates an upside of 13.4% against our S$4.32 fair value. In addition, the downside is limited by an attractive dividend yield of 7.1%, which is underpinned by a core newspaper segment yielding solid recurrent cash. Look for accretive acquisitions to be positive catalysts in FY11-12. We are upgrading SPH to BUY with a fair value estimate of S$4.32.

Came close for Jurong Gateway site tender... A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m (S$957 psf GFA) for a 99-year white site beside Jurong East MRT station. SPH's bid came in only 5.4% below the winning bid from a CapitaLand (CAPL) consortium and was significantly higher (16.7%) than the next highest bidder. This outcome was similar to a Bedok white site auction in Sep 10 when SPH's bid came in second after CAPL as well. In our view, these strong tenders from SPH underline management's continued desire to expand their retail landlord business. As of 2Q11, SPH's liquid capital (cash and ST investments) is estimated at S$1,034m with a net gearing of 13%. Assuming a net gearing ceiling of 70%, this translates to a sizeable acquisition war-chest of S$1,265m with limited need for additional debt-raising.

…and more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. On the confirmed list, there is a 2.07-ha commercial site on Sims Ave beside Paya Lebar MRT station. With a large GFA of 86,940 sqm, a developer could possibly build a retail mall component after setting aside the minimum office and hotel quantum requirements. In addition, there is a 0.88-ha commercial site at Sengkang West Ave beside Fernvale LRT station that could yield a retail development with 26,400 sqm GFA - around the size of Clementi Mall. On the reserve list, there is also a white site at Thomson Rd beside Novena MRT station with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.

TripleOne and 313@Somerset potential targets? It has been reported recently that TripleOne Somerset is on the market for about S$1.2b (S$2,132 psf NLA) and that 313@Somerset could be for sale as well. These assets may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more likely for SPH to consider acquiring a stake or participating in a joint venture instead of acquiring them wholly.

Successful execution at Clementi Mall. We visited Clementi Mall yesterday evening and found that it has opened for operations smoothly, with strong foot traffic from the captive flow of people between the mall, MRT station and bus interchange. (A recent report has pegged the daily number of visitors at Clementi Mall at 49k.) We also found that all retail stores have started sales, including the anchor tenants on every floor. Management had indicated that the mall is fully leased with an average monthly rent of S$14 psf. We expect rental revenues to roll in progressively as lease concessions wean off and forecast full annual revenue contributions at around S$30m after 4Q11. In our view, the successful execution at Clementi Mall highlights SPH's retail management capabilities outside of the high-end segment (Paragon) and the market would likely view SPH's suburban acquisitions favorably going forward.

Upgrade to BUY on valuation. SPH's current share price of S$3.81 indicates an upside of 13.4% to our fair value estimate of S$4.32. We value the core newspaper and magazine segment at S$4.2bn using a DCF methodology - this translates to an estimated 13.7 times FY11 segment earnings. We value Paragon and Clementi Mall at S$2.3bn and S$0.5bn respectively at cap rates of between 5-6% (FY12 net rental income).

Moreover, note that SPH's attractive dividend yield (27 cents) of 7.1% at this price is underpinned by the core newspaper and magazine segment, which throws out solid recurrent cash, and will likely limit share price downside. Look for accretive acquisitions to be positive catalysts in FY11-12 as SPH deploys its considerable capital into expanding its retail landlord business. We are upgrading SPH to BUY with a fair value estimate of S$4.32.